Consumers Warned About Debt Settlement Marks on Credit Report

By Faye MergelPublished: Monday, November 9th, 2009

Debt settlement firms promise that they will be there to help when consumers can no longer meet their obligations. They claim that they can reduce debts by 60 percent and stop embarrassing calls from collectors. They even promise to help consumers become debt free in 12 months. But many people do not know that debt settlement companies can only put them in a worse mess once lenders see a settlement noted on a credit report.

Experts warn consumers that getting out of debt is not easy and takes a lot of time. Alison Southwick of the Better Businesses Bureau (BBB), a consumer protection group, says companies which make big promises should raise a signal that something is wrong.

Still, consumers find it difficult to resist ads by debt settlement firms especially during the worst period of recession. BBB says it is no wonder why complaints made against such firms went up by 19 percent in 2008 from its previous year. Before talking with any firm, BBB advises consumers to understand how debt settlement works.

BBB says there is no real need to hire anyone since consumers can negotiate with their lenders themselves. National Foundation for Credit Counseling, a non-profit group based in Silver Spring, Md., adds that creditors know whether a borrower is a candidate for debt settlement since they have a complete picture of his finances.

Since a debt settlement is a huge red flag in a credit report, consumers are advised to seek other options first before going for it. A negotiated settlement entails a lot of serious consequences and is viewed by experts as a last option for borrowers. Those who are not yet certain what to do are advised to seek counseling help from non-profit groups.

Consumers who tighten their budget may still find it difficult to meet their obligations but they can still pay their debts back through debt management. It is an agreement where consumers can pay their debts at a longer period of time and through more manageable repayment terms.
Like a settlement, debt management leave a will mark on a person’s credit report but will not hurt his rating. Experts add that it costs less since it can be availed through a not-for-profit organization.

On the other hand, a debt settlement stays on a credit report and can severely hurt a credit score. Specialists add that a settlement will take years if a client does not have enough money to meet the negotiation amount demanded by the creditor. Despite that, experts note that people choose to work with settlement firms since they are daunted with the prospect of negotiating with creditors themselves.